International Financial Management
14th Edition
ISBN: 9780357130698
Author: Madura
Publisher: Cengage
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Suppose that the invester of GMO has an extra cash reserveof $700,000 to invest. The interest rate is 1.49% per year in the United States and 6.47% per year in Mexico. Currently, the spotexchange rate is 19.780 Pesos per dollar and the one-year forwardrate is €19.790 per dollar. The investor does not wishto bear any exchange risk. Assess how he can construct an arbitrage portfolio based on your calculation.
Suppose that you are the treasurer of IBM with an extra U.S. $1,000,000 to invest for six months. You are considering the purchase of U.S. T-bills that yield 1.810% (that’s a six month rate, not an annual rate by the way) and have a maturity of 26 weeks. The spot exchange rate is $1.00 = ¥100, and the six month forward rate is $1.00 = ¥110. The interest rate in Japan (on an investment of comparable risk) is 13 percent. What is your strategy?
Assume interest rates in the US are at 1.5% per year, and interest rates in Israel are at 6% per year, and that the shekel is trading at 4 sheckels/dollar.
If the two-year forward rate on sheckels is 4.3 sheckels/dollar, do you want to invest in dollars or sheckels to maximize your returns for the next two years?
How much would you make in arbitrage profits if you can borrow $10,000,000 or an equivalent amount of sheckels over this time period?
What sheckel/dollar forward rate implies no arbitrage?
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